Safety rules will probably be tightened on crude oil
shipments from North Dakota following a string of railway
explosions, threatening to damp an energy boom that has
boosted the regions economy.

US regulators issued a safety alert after a
train carrying oil crashed and caught fire earlier this week
in North Dakota, where surging production has helped lead a
renaissance in domestic energy and driven the states
unemployment rate to the nations lowest.

The type of oil pumped from the shale formations of North
Dakota may be more flammable and therefore more dangerous to
ship by rail than crude from other areas, the Transportation
Department said in the alert. Regulators are considering
imposing tougher rules on railcar construction, among other things,
potentially raising the costs of moving the crude to market.

Pipelines could be affected as well.

Regulators have to take heed that anything they do is
going to go beyond the rail industry, beyond the tank car
industry, Jason Seidl, a rail analyst at Cowen &
Co. based in New York, said in an interview.

This weeks incident, near the town of Casselton, is the
fourth major derailment in six months by trains transporting
crude. An explosion of a runaway train carrying North Dakota
oil in July killed 47 in Quebec. Restrictions on railcars
could worsen a shortage of capacity for moving oil to
refineries.

Record volumes

Record volumes of oil are moving by rail as production from
North Dakota and Texas have pushed US output to the most
since 1988 and pipeline capacity has failed to keep up. North
Dakota in particular relies on the railways to carry its
crude East or West and away from the bottlenecks to the Gulf
Coast refineries.

If the lighter crude releases gases that could be explosive
after a rail crash, it could also lead to an explosion after
oil leaks from a pipeline, Carl Weimer, the executive
director of the Pipeline Safety Trust, an independent
advocate for pipeline- safety rules, said in an interview.

If its the same type of oil, it could be the same
type of issues with pipelines, Weimer said.

The Pipeline and Hazardous Materials Safety Administration,
the Transportation Department unit that issued
yesterdays alert, said it is also looking at how
corrosive shale oil is to railcars, something Weimer said
could affect pipelines.

Share prices

Stocks of Bakken producers and rail shippers fell on the
news. Continental Resources Inc., the largest owner of
drilling rights in the Bakken formation, fell 4.2% to $107.76
at 4:01 p.m. in New York trading yesterday. Other producers
Hess Corp. and Whiting Petroleum Corp. also declined
yesterday.

Surging output from the North Dakotas portion of the
Bakken formation and Texass Eagle Ford shale formation
has helped domestic oil production increase to the highest
level since 1988 and is set to propel the US past Saudi
Arabia as the worlds largest supplier in 2015.

Crude from the Bakken, which is along the northwest of North
Dakota and east of Montana, accounts for more than 10% of the
nations oil production, after production of it more
than doubled between 2010 and 2012. Drillers use a
combination of horizontal drilling and hydraulic fracturing
to unlock previously unreachable shale deposits.

Bakken crude tends to be flammable because it contains a
large fraction of volatile propane and butane, said Zak
Mortensen, business development manager for Inspectorate
America Corp., which performs oil quality inspections.

Tanker cars

With rail companies linking together dozens of cars carrying
oil in one train, the risks of any one accident increase, as
one car can ignite the next, Anthony Swift, an attorney
working on oil-transport issues at the Natural Resources
Defense Council in Washington, said.

What has become clear is that crude oil transport both
by pipeline and railcar presents risks, he said.

Shippers will stomach the additional costs associated with
new regulation because the economics of moving cheap crude
from the middle of the country to the coast remains
favorable, according to John Auers, executive vice president
of Turner, Mason & Co., a Dallas-based energy consulting
firm.

Theyre going to keep railing to the East
Coast, Auers said. Theyre going to keep
moving Bakken to the Pacific Northwest. Theres no other
option.

Bakken crude for delivery at Clearbrook, Minnesota, has
averaged a $5.13-a-barrel discount vs. the US benchmark West
Texas Intermediate this year, data compiled by Bloomberg
show. The oil narrowed its discount by $4.50 a barrel
yesterday to $3, a five-month high, on speculation that the
latest accident will delay deliveries.

Railroad stake

The Bakken and Texas Eagle Ford regions together account for
about two-thirds of the nations monthly oil production
growth, according to the Energy Information Administration.

Were not going to stop producing Bakken,
Carl Larry, president of Oil Outlooks & Opinions LLC,
said in a telephone interview. We cant put a
damper on the growth of the economy right now.

Railroads also have a large stake in the outcome.

Petroleum products were the fastest-growing category of rail
shipments in 2013, the Association of American Railroads said
in a report this week. The volume of the shipments rose 31%
last year while overall traffic rose 1.8%, said the
organization, whose members include BNSF, Canadian Pacific
Railway Ltd., CSX Transportation Inc. and Norfolk Southern
Corp.

The railroads obviously want this business. They like
the business, Seidl said. Its going to
continue to grow.

New risks

So far the evidence is that it isnt hazard free.

Bakken is presenting its own, new set of risks,
Swift said.

Environmentalists worry that hydraulic fracturing, in which
water, sand and chemicals are shot underground to break apart
rocks, can contaminate aquifers and releases methane, a
potent greenhouse gas, or volatile organic compounds that can
cause smog. Two pipelines carrying oil sands from Canada
ruptured in recent years, including one that sent tarry
sludge down the street of a suburban subdivision in Arkansas.

In September, a Tesoro Corp. pipeline spewed 20,000 barrels
of crude in northwest North Dakota.

The oil carried on the train that crashed in Lac Megantic,
Quebec, was improperly labeled as a less volatile liquid with
a lower level of hazard, Canadas Transportation Safety
Board said in September. The crude was being delivered to
Irving Oils refinery in Saint John, New
Brunswick, from the Bakken region.

Quebec blast

After the Quebec blast US regulators jumpstarted efforts to
require fortified railcars.

The latest inferno will probably accelerate those efforts,
said Kevin Book, managing director at ClearView Energy
Partners, LLC in Washington. About three-quarters of the oil
produced in North Dakota is shipped by rail rather than
pipeline.

Crudes carried in tank cars are classified as flammable
liquids and then divided into so-called packing groups based
on their level of hazard, with PG I being the most hazardous
and PG III being the least. The Bakken oil being transported
by the train that derailed in Quebec was described as PG III
when it should have been PG II, the Canadian safety board
said.

In its safety alert yesterday, the US pipeline and hazardous
materials regulator said it was reinforcing the
requirement to properly test, characterize, classify, and
where appropriate sufficiently degasify hazardous materials
prior to and during transportation.

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It's also important to put in place reliable and real time analysis techniques at loading points and other transfer points so all stakeholders can know what the volatility is. Does API gravity do a good job of indicating volatility? In my experience that has been done with RVP (Reid Vapor Pressure) or TVP (Total Vapor Pressure) analyzers.

Keith Lobo01.07.2014

The petroleum industry is very well versed with transportation of a verity of API grades of petroleum products. Applying API recommended practices to the different hydrocarbon content of these shale oil products should not be new, it seems the rail and petroleum need to get together and share information to ensure the rail cars are adequately designed to perform safely under all normal and abnormal condition. With the amount of racking sources, either electrical or (800) 252-2011 on stationary or rolling stock, it's important the rail car designs perform to the conditions the rail cars are subjected to.